Contract Law - An Introduction

October, 2003; Last Reviewed Dec., 2010.

Contents

A contract intends to formalize an agreement between two or more parties,
in relation to a particular subject. Contracts can cover an extremely broad
range of matters, including the sale of goods or real property, the terms
of employment or of an independent contractor relationship, the settlement
of a dispute, and ownership of intellectual property developed as part of
a work for hire.

The Elements of a Contract

Typically, in order to be enforceable, a contract must involve the following
elements:

A "Meeting of the Minds" (Mutual Consent)

The parties to the contract have a mutual understanding of what the contract
covers. For example, in a contract for the sale of a "mustang",
the buyer thinks he will obtain a car and the seller believes he is contracting
to sell a horse, there is no meeting of the minds and the contract will
likely be held unenforceable.

Offer and Acceptance

The contract involves an offer (or more than one offer) to another party,
who accepts the offer. For example, in a contract for the sale of a piano,
the seller may offer the piano to the buyer for $1,000.00. The buyer's
acceptance of that offer is a necessary part of creating a binding contract
for the sale of the piano.

Please note that a counter-offer is not an acceptance, and will
typically be treated as a rejection of the offer. For example,
if the buyer counter-offers to purchase the piano for $800.00, that typically
counts as a rejection of the original offer for sale. If the seller accepts
the counter-offer, a contract may be completed. However, if the seller
rejects the counter-offer, the buyer will not ordinarily be entitled to
enforce the prior $1,000.00 price if the seller decides either to raise
the price or to sell the piano to somebody else.

Mutual Consideration (The mutual exchange of something of value)

In order to be valid, the parties to a contract must exchange something
of value. In the case of the sale of a piano, the buyer receives something
of value in the form of the piano, and the seller receives money.

While the validity of consideration may be subject to attack on the basis
that it is illusory (e.g., one party receives only what the other party
was already obligated to provide), or that there is a failure of consideration
(e.g., the consideration received by one party is essentially worthless),
these defenses will not let a party to a contract escape the consequences
of bad negotiation. For example, if a seller enters into a contract to
sell a piano for $100, and later gets an offer from somebody else for
$1,000, the seller can't revoke the contract on the basis that the piano
was worth a lot more than he bargained to receive.

Performance or Delivery

In order to be enforceable, the action contemplated by the contract must
be completed. For example, if the purchaser of a piano pays the $1,000
purchase price, he can enforce the contract to require the delivery of
the piano. However, unless the contract provides that delivery will occur
before payment, the buyer may not be able to enforce the contract if he
does not "perform" by paying the $1,000. Similarly, again depending
upon the contract terms, the seller may not be able to enforce the contract
without first delivering the piano.

In a typical "breach of contract" action, the party alleging
the breach will recite that it performed all of its duties under the contract,
whereas the other party failed to perform its duties or obligations.

Additionally, the following elements may factor into the enforceability of
any contract:

Good Faith

It is implicit within all contracts that the parties are acting in good
faith. For example, if the seller of a "mustang" knows that
the buyer thinks he is purchasing a car, but secretly intends to sell
the buyer a horse, the seller is not acting in good faith and the contract
will not be enforceable.

No Violation of Public Policy

In order to be enforceable, a contract cannot violate "public policy".
For example, if the subject matter of a contract is illegal, you cannot
enforce the contract. A contract for the sale of illegal drugs, for example,
violates public policy and is not enforceable.

Please note that public policy can shift. Traditionally, many states
refused to honor gambling debts incurred in other jurisdictions on public
policy grounds. However, as more and more states have permitted gambling
within their own borders, that policy has mostly been abandoned and gambling
debts from legal enterprises are now typically enforceable. (A "bookie"
might not be able to enforce a debt arising from an illegal gambling enterprise,
but a legal casino will now typically be able to enforce its debt.) Similarly,
it used to be legal to sell "switchblade kits" through the U.S.
mail, but that practice is now illegal. Contracts for the interstate sale
of such kits were no longer enforceable following that change in the law.

Oral Contracts

There is an old joke that "an oral contract isn't worth the paper it's
written on". That's a reference to the fact that it can be very difficult
to prove that an oral contract exists. Absent proof of the terms of the contract,
a party may be unable to enforce the contract or may be forced to settle for
less than the original bargain. Thus, even when there is not an opportunity
to draft up a formal contract, it is good practice to always make some sort
of writing, signed by both parties, to memorialize the key terms of an agreement.

At the same time, under most circumstances, if the terms of an oral contract
can be proved or are admitted by the other party, an oral contract is every
bit as enforceable as one that is in writing. There are, however,
"statute of fraud" laws which hold that some contracts cannot be
enforced unless reduced to writing and signed by both parties. For
more information on the Statute of Frauds,
please see this associated article.

Please note that, although sometimes an oral contract is referred to as a
"verbal contract", the term "oral" means "spoken"
while the term "verbal" can also mean" in words". Under
that definition, all contracts are technically "verbal". If you
mean to refer to a contract that is not written, although most people will
recognize what you mean by "verbal contract", for maximum clarity
it is helpful to refer to it as an "oral contract".